By Gabriel Wildau SHANGHAI, April 26 (Reuters) - China's yuan stepped up onFriday to another record high, as the central bank set itsmidpoint sharply higher as part an apparent effort to guide thespot rate closer to equilibrium level in advance of a possiblewidening of the daily trading band. Traders say authorities appear to be aiming at narrowing thegap between the central bank midpoint and the spotrate in order to avoid a sudden one-off appreciationof the spot rate once the band is widened. The People's Bank of China (PBOC) allows the spot exchangerate to rise or fall by no more than 1 percent from the dailymidpoint the PBOC sets each morning. The PBOC is likely to delay any widening in the band untilit is farily confident that the move will not lead to an abruptmovement of the spot rate. But most analysts and traders believethe move will occur sometime in the first half of this year. The spot rate has traded near the very top of the band sincethe fourth quarter of last year, with the midpoint is acting asa restraint on market forces pushing for stronger appreciation.(GRAPHIC: http://link.reuters.com/pyx74t) Leading up to Friday, the PBOC had set a series ofaggressively stronger midpoints this month, but the gap betweenthe spot rate and the fixing had not narrowed substantially. "(The central bank) keeps chasing the spot rate, but theycan't catch up to it," said a forex trader at a city commercialbank in Shanghai. A convergence between spot and fixing would boost confidencethat the strengthening of the spot rate this month hadsuccessfully released at least some of the pent-up appreciationpressure that weaker midpoints earlier in the year had held incheck. Progress on that score finally appeared on Friday. Spot yuanchanged hands at 6.1640 per dollar at midday, 56 pips weakerthan the top-end limit of 6.1586 based on Friday's midpoint. That compared to a distance of only 30 pips betweenThursday's closing level of 6.1707 and the same day's top-endlimit of 6.1677. The gap at Wednesday's close was 21 pips. But it's unclear if even this modest convergence issustainable. The yuan touched an intraday high of 6.1616 inearly trade on Friday, a gap of 30 pips.

SPECULATION China's trade surplus has continued to drive yuanappreciation this year, as it has for much of the last decade. Beyond this surplus, however, traders say speculation byChina-based corporates is responsible for why yuan demand hasconsistently outweighed dollar demand in China's interbankmarket. Balance of payments data released on Thursday showed Chinaposted a capital and financial account surplus of of$101.8 billion in the first quarter this year, a massiveincrease from the $20.0 billion surplus in the fourth quarterlast year. "A lot of the yuan buying is speculative behavior," said theShanghai-based trader, who said corporates are "overhedging"their exposure to the USD by buying yuan in forwards. One-year onshore swap points have fallensharply from 1,172 points on March 4 to 885 points at midday onFriday, which is consistent with heavy demand for forward yuan. Traders also say that relatively strong export figures inMarch reflected inflated export invoices used to disguisespeculative inflows. Hot money inflows may have totaled around $183 billion inthe first three months of this year, according to a Reutersestimate that excludes speculative inflows via deceptive tradeinvoicing. (GRAPHIC: http://link.reuters.com/raz74t)